Shared Ownership Mortgages

For many first-time buyers or those who may struggle to afford a full mortgage, shared ownership mortgages present an excellent solution for entering the property market. Shared ownership allows individuals to buy a portion of a property, typically between 25% and 75%, while renting the remainder from a housing association. Over time, buyers can gradually increase their ownership stake through a process called “staircasing.” This option is particularly valuable for those who cannot afford the full cost of buying a home on the open market.

In this article, we will explore shared ownership mortgages, including how they work, the benefits, and how to apply for one. We will also explain how shared ownership mortgages offer an affordable pathway to homeownership, especially in regions like the UK, where housing prices can be prohibitively expensive for many buyers.

What are Shared Ownership Mortgages?

A shared ownership mortgage allows a buyer to purchase a share of a property while renting the remaining portion from a housing association or private developer. Typically, buyers can purchase between 25% and 75% of the property’s value, with the option to increase their share over time through staircasing, which means buying additional shares as they can afford it. The buyer only needs a mortgage for the portion they own, which makes homeownership more affordable compared to purchasing a property outright.

This type of mortgage is often available for new build homes or properties offered through government schemes aimed at making homeownership more accessible. While shared ownership can be an attractive option for many buyers, it’s essential to understand how it works and whether it’s the right choice for your circumstances.

How Shared Ownership Mortgages Work

When you apply for a shared ownership mortgage, you typically need to meet certain eligibility criteria, including:

• Income Limits: Shared ownership schemes are typically aimed at people with a household income below a certain threshold. This limit varies depending on where you live and the specific scheme, but generally, the income cap is set at £80,000 outside London and £90,000 within London.
• First-Time Buyer: While not always a requirement, shared ownership is primarily designed for first-time buyers or people who have previously owned a home but are now unable to afford full ownership due to financial constraints.
• Property Availability: Shared ownership homes are usually available through housing associations or as part of new build developments. Not all properties are eligible for shared ownership, so it’s essential to check availability in your area.

Once you’re eligible, you can apply for a shared ownership mortgage with a lender, just as you would for any other mortgage. The key difference is that you will only be borrowing money for the percentage of the property you intend to buy.

Key Features of a Shared Ownership Mortgage

1. Lower Deposit Requirements

One of the primary benefits of shared ownership mortgages is that they require a much smaller deposit compared to traditional mortgages. Since you’re only purchasing a portion of the property, the deposit is calculated based on the value of the share you’re buying. For example, if you’re buying a 50% share in a property worth £200,000, your deposit will be based on £100,000 rather than the full £200,000.

This lower deposit requirement makes shared ownership mortgages a more affordable option for first-time buyers or those with limited savings for a traditional deposit.

2. Rent on the Remaining Share

For the portion of the property you do not own, you will pay rent to the housing association or developer. This rent is typically lower than what you would pay for a full mortgage, as it’s based on the value of the share you’re renting. However, rent prices can vary depending on the location and the specific scheme you’re participating in.

The rent you pay is usually reviewed annually, and it’s important to note that your rent may increase over time, typically in line with inflation or a pre-agreed percentage.

3. Staircasing

One of the most attractive aspects of shared ownership mortgages is the option to increase your ownership stake over time. This process is known as “staircasing.” You can buy additional shares in the property as your financial situation improves, which means you will eventually own the property outright.

The minimum amount you can purchase when staircasing is typically 10%, although some schemes may allow you to buy smaller increments. Staircasing is a great way to gradually move from part-ownership to full ownership as your budget allows.

4. Eligibility for Government Schemes

Shared ownership is part of the UK government’s efforts to make homeownership more accessible to those who cannot afford full-price homes. Many shared ownership schemes are available to those who meet the eligibility criteria, and some offer reduced rates for first-time buyers or people in specific demographics. If you’re looking to buy through a shared ownership mortgage, it’s a good idea to research available government schemes, which could reduce costs or provide financial assistance.

Benefits of Shared Ownership Mortgages

1. Affordable Homeownership

The primary benefit of shared ownership mortgages is that they make homeownership more affordable. By only purchasing a percentage of the property, you can get onto the property ladder at a more affordable price than buying a full share. With lower upfront costs and the option to rent part of the property, shared ownership allows many buyers to enter the housing market who otherwise might not be able to afford it.

2. Flexibility with Rent and Ownership

With shared ownership, you have the flexibility to increase your share of the property over time. This option, known as staircasing, allows you to gradually increase your investment in the property as your finances improve. It also gives you the flexibility to choose how much of the property you want to own and when.

3. Easier Access to Homeownership in Expensive Areas

In areas where property prices are higher, like London and the surrounding areas, shared ownership mortgages offer an alternative route to homeownership. Without the ability to afford full-price properties, shared ownership allows you to access homes in areas where buying outright would be too expensive. For many people in Kent, this can provide a viable route to owning their own home in a competitive housing market.

4. Opportunity for Future Capital Growth

As you buy additional shares in your property through staircasing, you’re gradually building equity. Over time, if property values in the area increase, you may benefit from capital growth, just as with a traditional mortgage. Since you’re building equity in the property over time, shared ownership can still be an excellent long-term investment.

Drawbacks of Shared Ownership Mortgages

1. Rent Increases

While shared ownership mortgages can be more affordable than full ownership, it’s important to consider that the rent you pay on the unowned portion of the property can increase. These rent increases may not be predictable and could become a financial strain if your income doesn’t increase accordingly.

2. Limited Choice of Properties

The availability of shared ownership properties may be limited in your area, particularly if you live outside major urban centers like London. Housing associations and developers only offer certain properties as part of the shared ownership scheme, so your choices may be limited in terms of location and type of property.

3. Fees for Staircasing

While staircasing allows you to purchase additional shares over time, it’s important to be aware that there are often fees associated with this process. These fees can include legal costs, valuation fees, and administrative costs, all of which can add up. It’s crucial to factor in these expenses when considering staircasing as a way to increase your ownership.

How to Apply for a Shared Ownership Mortgage

Applying for a shared ownership mortgage is similar to applying for a regular mortgage, though there are additional requirements. Here are the key steps involved:

1. Check Eligibility: Make sure you meet the eligibility criteria for the shared ownership scheme you are interested in, including income limits and location restrictions.
2. Find a Property: Search for available shared ownership properties through housing associations or developers. You can often find available homes through the government’s Help to Buy website.
3. Apply for a Mortgage: Once you’ve selected a property, apply for a mortgage for the share you wish to buy. Some mortgage lenders specialize in shared ownership mortgages, so it’s a good idea to speak to a mortgage broker or lender who understands this type of product.
4. Pay a Deposit: Typically, you will need to put down a deposit on the share of the property you are purchasing. The deposit is usually much lower than a full-price home, often around 5% of the share value.
5. Sign the Lease: After securing the mortgage and finalizing your application, you’ll sign a lease agreement for the portion you own and the rental agreement for the part of the property you are renting.

Conclusion

Shared ownership mortgages offer a unique and affordable route to homeownership for people who may otherwise struggle to get onto the property ladder. By purchasing a portion of the property and renting the remainder, buyers can access homeownership in areas where property prices are too high for a traditional mortgage.

With the flexibility to gradually increase ownership over time, shared ownership mortgages are an excellent way to get started on the property ladder and build equity. However, it’s important to understand the potential drawbacks, including rent increases and limited property availability.

If you’re interested in learning more about shared ownership mortgages, visit PHLS Mortgages Shared Ownership Mortgages to explore your options and find a solution that works for your financial situation.